Royal Mail seeks power to hike second class rate by 53%

Royal Mail is urging regulators in the UK to abandon price caps for most of its services, and set the remaining second class letters price cap at 55p. The move would allow free reign for Royal Mail to set prices as it wishes, for example in first class, while for second class could mean a price increase above 50% from the current 36p.

The request came in response to regulator Ofcom’s consultation on the future of the universal service in the UK, a consultation that closed earlier this month.

Royal Mail’s view, published this week, was that given its rocky financial position and the fact that some of its prices are currently below cost, postal rate increases are “likely” in the short term.

The postal service, which is heading towards potential privatisation at the moment, said it does need to continue its cost-cutting modernisation plan.

But, it said the UK had seen the “steepest” decline in mail volumes in Europe, with a 25% drop in volumes since 2006 thanks to competition from the Internet and mobile telephones, and while its revenues fall as mail volumes fall, costs from its six-day-a-week universal service do not reduce in parallel.

Royal Mail also blamed competition from its rivals in the liberalised downstream access market for loss of 45% of its upstream volume since 2006, stating that it now has less than a 30% share of the upstream bulk mail market. Further loss of volume in that direction would cause “profound” effects on the sustainability of the universal service, it warned.

While letter volumes have fallen 6% in the first half of 2011-12, parcel volumes have been increasing beyond forecasts, by 5%, which have added further strain to the Royal Mail network.

“This change in mail mix has a significant impact on Royal Mail’s delivery economics,” said Royal Mail. “It makes the cost challenge much more difficult, as packets and parcels cost significantly more to process through Royal Mail’s network than letters.”

Affordability concern

Royal Mail, which is urging a 10-14% commercial margin be set for universal services, insisted there was “no affordability concern” with its pricing ambitions, because average household spending on post was “low” compared to other forms of communication at around 0.1% of household income.

“There is a very significant margin available before universal service prices might be considered unaffordable,” it said.

Royal Mail also argued that continuing a price cap on universal service packets and parcels would be “out of line with proportionate regulation”, stating that the standard parcels service was “little used”, though figures were censored for commercial reasons.

“There is no evidence to suggest affordability concerns and indeed vulnerable groups are proportionately the lowest users of this product,” said the Royal Mail.

Regarding Ofcom’s hopes to open up competition in providing end-to-end mail services, Royal Mail warned of the potential for rivals to “cherry pick” its best routes, and the impact that would have on the sustainability of the universal service. It said Ofcom should set out very clear requirements for approving other companies to provide such services, hinting at the need for tight controls in that area.

In its response to the consultation, the Direct Marketing Association said last month that businesses could be driven away from using the mail if Royal Mail has its price controls removed.

Other customer groups have expressed similar concerns. The Federation of Small Business chairman Clive Davenport warned that in the worst case scenario, small businesses could be “priced out of the market”, especially in areas where there is no postal competitor to use as an alternative.

Davenport criticised Ofcom’s suggestion that if prices are affordable for consumers, they will be affordable for businesses as well. “Most small businesses are likely to use Royal Mail’s services on a more frequent basis than the consumer,” he stated, adding that businesses use a wider range of Royal Mail’s serivces, while Ofcom will only be protecting costs of a basic universal service.

Rival mail company UK Mail Group case doubt on Ofcom’s proposed safeguards for regulating Royal Mail prices with the proposed commercial freedoms.

The Birmingham-based bulk mail specialist warned that giving Royal Mail the ability to significantly increase prices would cause an “irreversible” shift of customers seeking alternative communication channels.

It said in its response to the consultation: “We believe, as do many other mail users, that such increases would ‘snap any past elasticities’ and lead to irreversible losses of mail use, mainly due to technological and systems investments becoming embedded.”